The SA Government has announced a Royal Commission into nuclear energy. In the first in an NM series, Rob Parker, president of the Australian Nuclear Association offers suggestions for six areas of focus.

Keep Spending, Mr Swan

If Wayne Swan wants to live up to the Finance Minister of the Year title, he should stop promising to deliver a surplus the next budget, writes Ben Eltham

Wayne Swan's budget surplus is in peril. Dark clouds have gathered over the global economy, especially the rich economies on either side of the Atlantic. There's a looming sovereign debt crisis in Europe, the US is bouncing along the bottom of an economic contraction that has now lasted half a decade and Japan is still recovering from its devastating earthquake, tsunami and nuclear meltdown. All this adds up to slower world growth — which will inevitably take some of the heat out of China's booming economy on which so much of Australia's resources wealth is based.

At home, many parts of the Australian economy are themselves struggling, notably manufacturing, which is clearly contracting and shedding jobs in the process. We're not headed for a recession on current indicators, but Swan has a problem: the economy is slowing down, and that is going to crimp tax revenues at the very time the Government needs them to pick up. Swan himself recognises the issue, as he told Australian reporters gathered outside the ceremony in Washington where he received his prize as Euromoney magazine's Finance Minister of the Year award.

"We're determined to come back to surplus but I just make the observation that these events globally have an impact upon global growth, that has an impact upon domestic growth that has an impact on revenue collections and or course it makes it tougher to come back to surplus," said Swan.

"But I want to make it very clear we are determined to come back to surplus. That's what we've said we will do and we're determined to do."

But is that what he should do?

The Government's entire economic policy has been built around a rapid return to surplus next year, after the comparatively small deficits racked up in 2008-11 as the government spent up to keep the economy out of recession.

Of course, the economy did stay out of recession, largely thanks to the prompt and effective stimulus policy.

Ordinary Australians may not realise it, but compared to Europe and America, Australia is unusually blessed with high-quality economic policy-makers. Glenn Stevens at the Reserve Bank and Ken Henry at the Treasury made a huge contribution to our future prosperity with their sound advice to Swan during the crisis, but it was Swan and Kevin Rudd's determination to back this advice that enabled Australia to execute a textbook economic turnaround.

Let's just remind ourselves that our economy is still growing and that unemployment is just above 5 per cent. Despite some serious early job losses in the mining industry (giving the lie to the myth that Australia was saved by our mining industries — we weren't), prompt action by the Government kept consumer spending at reasonable levels and put spare capacity to work in the construction sector with a much-needed infrastructure boost to our nation's primary schools.

Euromoney's Eric Ellis has been chronicling the attacks on Swan in Australia with some amusement. "Surrounded by the consumer baubles that wealth brings, grumpy Australians don't seem to appreciate how good they've had it," he wrote this month — and it's hard to disagree.

Unfortunately for Labor, voters here seem to take a very different view of their own finances to the government's. Many Australian families groan under the weight of huge mortgages taken out to buy houses they can barely afford. But they simultaneously abhor the Australian Government's tiny budget deficit of $22 billion, or around 1.5 per cent of GDP. Australia's debt will peak at something under 8 per cent of our gross domestic product, a manageable burden in any sense of the word.

But, as with so many other issues, the Gillard Government has found itself out-maneuvered by a nimble Opposition prepared ruthlessly to attack Labor's supposedly profligate ways. Tony Abbott and Joe Hockey may struggle to make their own election costings add up, but that hasn't stopped them from repeatedly tearing at Labor's fiscal credibility with their ominous prediction that Labor will never return a surplus while in government. It doesn't help, either, that two of the Government's most prominent policies are taxes. As a result, many voters seem to have taken on board the message that Labor is a wasteful government and a poor manager of the economy.

Wayne Swan's long-term plan to address the credibility issue has been to promise a surplus in 2012-13. To say he and the government are desperate to return a surplus next year is rather to understate matters. Returning to surplus is essentially Labor's single and entire fiscal policy goal for this term, and the threat of not achieving it must be truly terrifying for a Treasurer who already has plenty to keep him up at night.

Bear in mind that the current fall in government spending is already the fastest correction from a recession since Treasury began to keep records. The government's plan to rapidly return to surplus is slicing perhaps two full percentage points off growth this financial year. The broader economy would certainly be in a healthier state if the drop-off in Canberra's spending was slightly less rapid.

After all, the issue of whether Australia should turn in a surplus next year is entirely political. From a purely economic standpoint, it would be far preferable to keep fiscal settings roughly as they now and to let the budget return to surplus a year later, in 2013-14. Indeed, the Commonwealth Bank's Ralph Norris said precisely this in a speech yesterday. But that would constitute another broken promise for Labor, and the Opposition would be understandably cock-a-hoop.

So Labor may very well decide to cut deep and hard in the budget next May in order to show some kind of surplus. For political purposes, almost any amount would do, even in the few hundred million dollars.

It won't be easy. We won't know the full fiscal situation until the mid-year economic and fiscal outlook papers are released later this year, but on every indication, the budget deficit looks to be widening.

So by April next year, Wayne Swan and Penny Wong will be faced with some tough choices. Remember that the government has already squeezed many of its departments hard, capping spending increases at 2 per cent a year and enforcing an increased annual efficiency dividend, which requires all government departments and agencies to slash 1.5 per cent off their spending every year. This means that the government won't easily be able to find billions in nips and tucks here and there.

A more likely scenario is that significant cuts will have to be made to one or more national spending programs, such as defence, family tax benefits or the private health insurance rebate (which Labor has been trying to means test for years, but has been stopped from doing so by the Senate).

Swan's upcoming tax summit offers some equally unattractive possibilities, such as raising taxes or eliminating tax loopholes in areas such as superannuation, capital gains tax or negative gearing. Tax concessions in these areas cost tens of billions, but Labor would not be relishing the prospect of yet another battle over taxes in the run-up to the doomsday election of 2013. Slashing spending would also further damage the domestic economy at a time when confidence is low.

On the other hand, Swan could simply leave the budget in deficit another year. If he really wants to live up to his new title as Finance Minister of the Year, he should be able to explain the policy to the Australian public.

This article ignores the off budget spending (eg NBN) that is crowding out the market. The government needs to exit the arena and take the pressure off interest rates, the dollar, wages and debt.

It also ignores the fact that the northern hemisphere is having a debt crisis. Taking on more debt here in Australia is exactly what we should not be doing. Nothing we could do spendingwise would be sufficient to protect us from the global effects of what the US and Europe are going through.

Ben, you talk about billions of dollars as it were change in the pocket. The amount of money that is wasted in this Country is astronomical. Tax in this country is out of hand. The dual Government (Federal and State) in itself wastes more money than some small economies.
When Swan instructs cuts to departments, it is usually to the front line staff who actually give public service, it is never to the middle or upper middle management who have been promoted beyond their capabilities. The insulation debacle highlighted this. There was nobody to oversee its implementation.
Until we get our feet back on the ground and cut out all forms of corruption (mates rates) the plebs of this country will continue to see their standard of living eroded.

Bill Hartigan
Ben Eltham does not appear to realise that it isn't a budget surplus in a specific year that is as important as the overall level of all Governments' borrowings.The total of all Governments' borrowings, State and Commonwealth, is now $500 billion. Some $100 billion of this is owed by Government Owned Corporatios (Utility companies, railways etc. which nominally at least have the capacity to service their debt from the income of their businesses. Unfortunately, the balance of the borrowings has been applied to the provision of "free" services such as Health, Education , Roads, police etc which are not only unable to directly fund their debt but which demand recurrent expenditure as the demand for these services is ongoing. THEY must be financed by the taxpayer , either now at much greater cost in the future. The use of Government borrowing in this manner,competes with the private sector raising their costs of borrowing, and forcing borrowers overseas, raising the interest rate and the exchange rate and reducing the tradeable sectors competitiveness. The lower,interest free regime ,supported by Government Guaranteed Bondsis the root cause of the financial disaster facing Europe and the USA. The right approach for all Australian Governments right now is to work on lowering debt as quickly as possible and principally by cost cutting in Government administration , particularly while the Labor market is tight and when immigration targets can be cut to minimise unemployment. It would make a lot of sense to curtail expernditure on the NBN and the Carbon dioxidetax, until the global circumstances stabilise and debt is controlled

Cost cutting in Government administration. (What and how much?)
Get rid of "free" services. (To what extent?)
Limit immigration.( By how much, close the borders?)
Curtail expenditure on the NBN. (No future proofing?)
No ETS until global circumstances stabilise (When is that?)
No debt. (Keep it in the coffers?)

Simplicity par excellence. Sorry mate, back to the old drawing board!

This scheme looks pretty similar to the one Howard employed and we know now how many of the important measures that should have been implemented were sacrificed on the altar of government self promotion and self indulgence. Government debt for political reasons only was largely shifted to the private sector. Despite the GFC we are slowly addressing the neglect of that era.

yes, the states have racked up a fair bit more debt than the Commonwealth.

But are they in over their heads? Of course they aren't. Not even the ratings agencies think so. Even Queensland still retains AA+ rating, despite a hundred billion dollar debt-financed infrastructure program and being hammered by the floods. As for the government-owned corporations, they seem to have no trouble lifting their prices to service their debts, as electricity consumers in Qld and NSW are discovering.

Arguing that the NBN is crowding out infrastructure investment seems to have little connection to the facts .... there are hundreds of billions of dollars of mining investment locked in and just today, in the very industry that the NBN will operate in, Telstra has announced a big new wireless broadband project.

"Tax the Rich" followed by "Keep on Spending"? One begins to think you are being deliberately mischievous!

I assume in your comments above you are talking about the same ratings agencies that were rating tranches of CDO debt AAA briefly before it became apparent that investors would be taking losses of principal? (If so we should agree to never use ratings of evidence of anything other than the immense gullibility of humans)

The fundamental question is whether it makes sense for Australian Govts to be putting themselves in a position where they are reliant on foreign debt given the global crisis in sovereign credit? Ratings don't matter one iota if you can't raise funding period.

The additional issue for the Aussie Govt (on top of the States borrowings) is the several hundred billion or more they might have to tip into the Australian banking system to keep it afloat if China slows down and foreign lenders start to worry about our capacity to repay.

Having said that I certainly agree with the premise that whether or not we return to surplus in 2012/13 is neither here not there. Labor painted that corner for themselves and it was pretty silly since it was always going to be only a few hundred million to a billion or so either way and the outcome was never going to be in Wayne Swan's control.

The more important point is how we are going to quickly get ourselves in the position where we are generating surpluses of significance (say $50b) so that we can remain a sustainable economy rather than ending up as a carcass for the capital markets to feast on. The situation in Europe has proven the fallacy of relying on a sovereign's ability to tax in order to repay their creditors.

Ben, if we had competent economic managers, management and media in Australia, our cities would export more than they import. They don't Ben, they don't. Our cities are a future eating hemorrhage of cash, never seen again, as it sails offshore.
Our immigration policies would be economic based not welfare based. That is, the only valid reason for immigration ought to be how a candidate migrant would assist Australia to be more competitive in the globalised economy.*
Australian farmland and mines would be reserved for Australians only. Domestic housing likewise.
Our transport infrastructure would be built ahead of need rather than 30 years or so, behind the need.
And finally, Australia would be a creditor nation [these exist] rather than a debtor nation. If you have to focus on what your credit rating is you are truly a loser.
This is what Australia's economic spin doctors have done to our country. Ohh so keen to drive us to debt.

* At the moment, we have a body politic corrupted by building, development, and retail sleazes, who can fairly argue that they own whole political parties. These are the sleazes who have dictated our bloating immigration policies.

"The amount of money that is wasted in this Country is astronomical". (cheep one liner - proof?)
"The dual Government (Federal and State) in itself wastes more money than some small economies". (cheap one liner - proof?)
"Cuts to departments". (where and by how much?)
"The insulation debacle." (speedy GFC measure worked well, apart from abuse by contractors by breaching of clearly defined OH&S regulations)
"Cut out all forms of corruption". (cheap one liner - proof?)

What it boils down to is "put up or shut up". If you can't, let's put it down to useless whinging. QED

@Compass1312 posted Wednesday, 28 September 11 at 2:50PM

"I am sick of watching our tax dollars frittered away when they can be put to much better use".

You are totally right. You nailed it. Sleazes, sleazes everywhere. You fit right in!
You are in fact a glowing example of the quintessential armchair critic everyone should avoid to emulate!
Another one of your perfect "sleazy" contributions. Well done!

It seems to me that YOU are the armchair critic. You have tried to completely undermine any and all points put forward without any input whatsoever. If you want proof go and look for it yourself, like most people do. This is a forum for comments not diatribes.

The insulation program worked well if you ignore the shoddy installation, deaths, Govt disregarding advice and the several hundred million spent on the audit afterwards to work out how badly the jobs had been done. Of course you also need to ignore the question of whether it was a dopey scheme in the first place.

One thinks of Monty Python and the Romans when they hear these types of arguments.. "Yes but apart from that, they've done a good job"...

This fellow Swan trading under the nom de plume World's Greatest Treasurer still hasn't worked out that government spending is an overhead charge on the community. Any organisation that spends more than it earns goes broke, except government in the short term, they being the sole providers of paper money to add to the pool.

Governments sooner or later will comprehend that all they are there for is to provide the services the general populace want of it. (And defend us from evil) Quite apart from any goods and services the private sector is prepared to provide. The same populace permit governments to tax them for reasonable purposes. The populace will eventually see thru' ill-conceived vote-winning "free" give aways with jobs for the boy mates, and wasteful overhead spending, and condemn them to failure.

How much economists' fiat money has been printed during the GFC by our now infamous Plastic Note Printing works and added to the economy to keep Australia's head above water? If Oz goes under it will all come out in the wash.

I just wonder how many posters here have made the effort to look at ALL the legislations and policies so far implemented by the current government. Suspending momentarily any emotional lopsided rants and hyperbole and instead focusing on what has already been achieved since 2007. I mean realistically going through the list and honestly acknowledging the things that have been done. Conjuring up the negatives always comes easy. Looking at the positives takes effort which some people are simply not willing to make.

Being no apologist for this or any government but I would suggest for the sake of an enlightened discussion a balanced viewpoint would be helpful. Once the fundamentals are established the focus could than shift to future directions.

It's just getting a bit boring having the some people here trotting out the same, often very skewed arguments. Signing off, back to work!

@GocomSys, as usual, you don't deal with the facts.
The facts pertaining to Sussex St, property developers, etc, are well known. Hence the slag "Sussex St Sewer". A total donation domination of a political party if you ever needed one. Still, no negative evidence is allowed to pass @GocomSys eyes.
You don't actually work in the sewer - do you @Gocom? Is that the problem?
No, couldn't possibly be. Not even the sewer would take you on. Surely?
Meanwhile, you fail [again] to deal with the guts of my argument.
That we haven't had competent economic management.
We haven't had competent national leadership.
We have structurally stuffed our economy via a deliberate, spin driven, confusion of "population growth" with sustainable, investment and reinvestment driven, productivity driven, "growth".
We have bloated our economy with welfare dependent dormitories of consumers, motivated by "what Australia can do for an immigrant" - and ignored the very real cost of warping our nation's economy via the irrationally motivated bloating of one element of an economy - initially labelled "labour", now "consumer" - that could be summed up as "what an immigrant can do for Australia".
The lasting cost of this mismanagement is our collective future. The ownership of our nation. The control of our future. This is the cost. A total dependence on overseas capital and overseas nation states to band aid the permanent damage done by quisling political parties getting their orders via greedy special interest groups.
Our economy is of our own making.
Few countries in history have had the flexibility and means to do the right thing for its future generations.
The fact that we have ignored sensible, logical advice [see early productivity commission reports], and taken this low, low road is unforgivable.

You know, it is pointless ignoring the fact that Australia remains a democracy, not some Keynesian autocracy, and so criticising the views of the Australian voter, as if the voter should be co-erced into some populist politically correct economic Keynesian views, like the current autocracy ruling Europe, is not very productive.

Gillard was voted in because she promised not to introduce a carbon tax and she promised to bring the budget back into surplus by 2013.

Our future fund is being pilfered in a vain attempt to b/s the Australian public that these promises are being met and she has downright b/s us all about the carbon tax from the very beginning.

In the meantime your piece talks of our wonderful Mr Stevens. Did you know that Mr Stevens is paid 5 times ( 500% ) more than Mr Bernanke. Why? Is he really worth that salary? I think we're being ripped off, but then, who actually owns that Central Bank? Who really is his boss?

Mr Glen Stevens is paid twice as much as the governor of the European Central Bank, Mr Trichet - why? What magic has that Womble performed for us? What productive enterprise has he brought about for the Australian voter?

Nothing.

We need a change of guard amongst our economists Ben.

By the way, have you seen the latest action figure for the Keynesian kid?

Even those policies which have not been blatant failures - eg reversing work choices, stimulus - are matters of serious philosophical debate and can hardly be counted as "successes" by any independent observer.

To be honest I am happy for you to make suggestions but I struggle to think of anything off the top of my head that this Government could clearly count as a policy success. I can think of two much need reviews which they initiated - Tax Reform (where disregarded almost every single recommendation) and State Grants (assuming this ever sees the light of day) - but I am struggling beyond that.

I can't speak for others but I am more than happy to consider the positives. I am just struggling to find them.

This user is a New Matilda supporter.gooniePosted Thursday, September 29, 2011 - 17:15

Frank from Frankston, look up "bullionism" on Wikipedia.

On other matters, billions of dollars *is* pocket change in the context of the government budget. Australia's gross domestic product is now 1.3 *trillion* dollars.

That's right

1,300,000,000,000 dollars.

Government expenditure represents about 25% of that, so about 325 billion dollars.

That's

325,000,000,000 dollars.

In that context, restricting waste to a few billion dollars wasted annually would not only be acceptable, it would be a remarkable achievement.

To take an example from the private sector, BHP Billiton is generally regarded as a relatively conservative, parsimonious company. But they managed to waste 3.6 billion dollars on the Ravensthorpe nickel mine. Is anybody screaming for BHP management's head? Nope, because it's accepted that a certain level of waste will happen, and the overall management of the company has been reasonably good recently.

Fair points Goonie. Also highlights how trivial the production of a billion dollar surplus is. Allowing only 10pc margin for conservatism, future capex and to cover the unexpected (eg Queensland floods) would give 30b surplus as the benchmark upon which a treasurer could claim he'd done a good job.

Partly because of the obscene rorting and wastage of the stimulus program (insulation bats and schools halls). Blind Freddy could tell you that school halls are not an education revolution, and that the wastage of the insulation bats program would have been hugely reduced if customers had to pay even 25% of the cost. I accept the need for haste in the early days of the GFC, but these programs should have been scaled back and re-evaluated the second that the height of the panic eased. This has tax payers fuming, and rightly so.

2. "Australia’s debt will peak at something under 8 per cent of our gross domestic product, a manageable burden in any sense of the word."

Really? How much confidence do you have in this predicted maximum debt level and our ability to painlessly repay it, in the same paragraph as you discuss how increasing world turmoil and uncertainty has blown away last year's forward revenue estimates and you egg on Swan to keep spending?

The collective intelligence of the voting public should be listened to in this instance - they know the world outlook is uncertain to bad for the next decade, they remember the pain of cutbacks to pay off the government debt of the Keating years, and they know that 'stimulus jobs' are temporary and expensive, and Greece is showing everyone how real and painful sovereign default can be. Thank goodness Swan is smart enough to hear the people's concern - a pity that he won't have the ticker to pull it off though.

The moral of the story: Keynesian stimulus might be good as a temporary stop-gap measure, such as for traditional economic cycle crashes (6mth-1yr) or panic situations. For the prolonged structural problems faced by the West now though, we will run out of money before the slump ends - time to start asking hard questions about about the new world order and how to promote growth without government 'pump-priming'.

<cite>
How much confidence do you have in this predicted maximum debt level and our ability to painlessly repay it, in the same paragraph as you discuss how increasing world turmoil and uncertainty has blown away last year’s forward revenue estimates and you egg on Swan to keep spending?</cite>

Lots. No Australian federal or state government has ever defaulted on its debt. Australia's public debt repayments are trivial. Australia spent $6.3 billion in servicing federal debt in 2009-10, the last year for which full AOFM figures are available. We spend more on private schools than this.

You hit the nail on the head. Without Govt pump priming we won't see growth going forward. So the Greens will get their wishes and it won't take a carbon tax to do it

Unfortunately because Govts have pumped so hard over the last decade or so to keep their growth dream alive we have some serious payback to account for first. It's going to be a tough decade or so coming up as the Govt fueled credit expansion finally goes into reverse. Of course they won't let the reversal come without serious efforts to kick the can down the road but the situation in Europe and the US shows the futility of such efforts.